7.3.3 Cost Implications of Different Scenario Approaches

The costs of climate change mitigation policies are, by definition, a net incremental
cost relative to a given scenario, which includes assumptions on both the baseline
case and the policy case. The following section presents a taxonomy of baseline
cases and policy scenario cases and discusses these in relation to cost assessments.

In Section 7.2 it is stated that cost assessments should
include, in principle, all costs and benefits related to the policies as well
as any ancillary benefits and costs. The actual determination of impacts related
to the policies, however, is open to interpretation and discussion, and the
actual selection of system boundaries for the cost assessment will reflect specific
assumptions in the baseline as well as in the policy case scenario.

One way to evaluate the impact of different scenario structures on costs is
to distinguish between the gross and the net costs of climate change mitigation
policies. Gross costs are here defined to reflect all direct and indirect costs
and benefits of the mitigation policy, when this policy is considered as the
primary policy objective. Net costs are the gross costs corrected for side effects
that result from potential synergies or trade-offs between mitigation policies
and general economic policies or non-GHG environmental policies. These side
effects can be divided into three categories (IPCC, 1996a, Chapter 8):

A double dividend related to recycling of the revenue of carbon taxes in
such a way that it offsets distortionary taxes.

Ancillary impacts, which can be synergies or trade-offs in cases in which
the reduction of GHG emissions have joint impacts on other environmental policies
(i.e., relating to local air pollution, urban congestion, or land and
natural resource degradation). These are referred to as ancillary or co-benefits
and are discussed in Section 7.2.2.

Impacts on technological development and efficiency. These include specific
incentives to develop and penetrate new technologies, technology learning,
and reduction of current barriers to efficiency improvements in existing technical
systems (part of these impacts are considered as part of the so called no
regret potential, see Section 7.3.4.2 for a more detailed
discussion).